Dark Trading Caps Not Responsible for Periodic Auction Growth, Study Finds

On June 25, the UK regulator published a study on the surge in periodic-auction trading since the implementation of the revised Markets in Financial Markets Directive (Mifid II), and its continued growth following the introduction of double-volume cap data (DVC) on March 12.

The findings indicate that periodic auctions remain a small portion of the market landscape and that the most recent data fails to support the theory that DVC is the sole reason for its increasing popularity. Christian Voigt, senior regulatory adviser at Fidessa says that FCA’s report acknowledges the shift in trading practices and that the recent results lay the foundation for further research.

“These analysis reports are the right way forward because it enables us to have a fact-based discussion, he adds. “As it stands right now and what the FCA report concluded is that they don’t see any major concerns and that they [periodic auctions] indeed provide good liquidity. If anyone disagrees with that point then they should use this now to speak up.”

The report outlines that, although there is some evidence to suggest that a small share of market participants have switched from dark trading to periodic auctions in response to DVC, there are multiple other explanations to consider. Periodic auctions have proven attractive in recent months due to their suitability for large-size trades, aligning with a growing trend in block trading. Additionally, the trading venue removes the need for high-speed trading, by queuing orders and enabling market participants to make well-informed trading decisions. This, in turn, reduces the burden of investing in costly high-speed technologies, such as servers located near exchanges and direct fiber-optic connections.

“One of the key reasons for the growth of periodic-auctions trading is that order size is prioritized over speed and many market participants really appreciate this feature,” says Mark Hemsley, president of Cboe Europe. “It means that they don’t need to have the fastest connections or latest technologies to get to the front of the order queue, they simply have to be willing to trade in larger size.”

Following the adoption of Mifid II regulations this year, the market landscape has changed with the introduction of further trading venues. As some of these shifts have yet to be fully realized, the move to periodic auction trading is welcomed as a compliant and secure way of trading large orders.

“We find the quality of execution in periodic auctions to be increased over and above traditional dark pools, says Duncan Higgins, head of electronic sales at ITG. “ And while fragmentation of liquidity across the various execution venues creates more complexity, it also allows for more choice and we welcome that aspect of the change.”

The FCA outlined that this is the first of many reports, and as market participants adjust to the new regulatory environment further analysis will be carried out on the impact of Mifid II and the changing market landscape.